Summer Stock Fireworks

Stocks greeted July with fireworks that burst through a fog of negativity. Their five percent gain was their best week in two years. That should help investors to approach the market with more rational analysis rather than giving in to emotions. This advice is easier given than practiced, even for the pros, but it might help to recall this recent skyrocket week when the next 100-point sell-off sparks feelings of panic.

I have little doubt such sell-offs will reappear before the summer is over. For one thing, triple-digit days are more frequent now than twenty years ago when the Dow Jones Average was 2,700 and a 100-point was almost 4%. With the Dow once again nearing 13,000, it‘s not even 1%.

These swings provide an excuse for some to avoid the market, claiming, “It’s just too volatile.” These are often the same people who chose the less publicized price fluctuations in real estate, perhaps just in time to buy condos in Florida. Three-digit moves in the market are now hardly newsworthy. As recent market action demonstrated, they can also be quite rewarding.

While rising tides may lift all boats, soundly fitted and smartly navigated boats leave the pack behind. Rather than passive conformity to market movements, I advocate continuing tuning of portfolios to anticipate economic changes and company developments. New job and retail sales reports provided appreciable good news but these linked sectors must still beat against the current.

Consumer stocks, particularly those dependent on discretionary spending, should be avoided, probably until the housing market shows signs of bottoming. Loans on housing remain a tender topic. Borrowers are less able than lenders to conceal dubious home loans on their balance sheets and bank stocks should be shunned on the probability that they still haven’t confessed all their sins.

Energy companies are pursuing their usual path, attracting unfavorable attention to their environmental, lobbying and managerial misdeeds, while continuing solid earnings growth. Small wonder, as I wrote a week ago, noting that increasing demand the world over keeps lifting the prices of their products. I recommended energy service stocks Core Labs (CLB-$116), Carbo Ceramics (CRR-$167) and Weatherford (WFT-$19). These are current prices as all three are up, along with most other stocks, and they are all still buys.

Lost in the miasma of negative thinking were increasing sales by American manufacturers. Federal Reserve policies that increased the value of overseas currencies against the dollar provided support, adding jobs in this basic sector. (This is the so-called “weak dollar” that spawns much ignorant political rhetoric.) June earnings reports begin arriving in a week and smart buys now should be well timed.

I am adding Altera (ALTR-$48), an archetypical Silicon Valley maker of advanced semiconductors. Sales are $2 billion, growing steadily at 11% for the last five years with earnings growing at 22%. Analysts forecast $.64 for the June quarter, up 10%. This moderating but steady growth has reduced its valuation to a modest 18 times forward earnings. With a 0.5% yield from dividends raised for three straight years, Altera is a model for its peers.

Summer brings reduced trading volume, sometimes exaggerating price fluctuations. With some fears abated, I think nimble investors may trade with greater ease. They should keep a weather eye on the new earnings reports, particularly on company comments on the outlook for the rest of 2011. These fresh breezes are favoring stocks.